Tuesday, December 2, 2014

Strong capital flows, from both equity and debt sources, are boosting the liquidity of the commercial real estate market and driving transaction activity. Equity capital of all stripes — from local investors and 1031 exchanges to institutions that include real estate investment trusts, private equity, and sovereign wealth funds — have accelerated acquisitions and portfolio repositioning to capitalize on the low cost of capital, consistent revenue streams, and rising prospect for appreciation.
At the same time, lenders are back in full force just a few years after the banking crisis. The volume of commercial mortgages, after dropping about 10 percent during the credit crisis, reached a new high at midyear, rising by $140 billion over the past 12 months. Commercial banks have picked up activity in both fixed- and floating-rate loans, commercial mortgage-backed securities volume is strong a second year in a row, insurance companies and government-sponsored agency lenders remain competitive, and mezzanine funds abound.
The wave of liquidity has pushed property prices to record or near-record levels in core markets and is in the process of working its way to secondary and tertiary markets. Property sales are growing in nearly every metro, but investors are increasingly targeting assets in non-core markets as they pursue yields and opportunities with less fervent bidding activity.

A Stronger Economy

The increased liquidity reflects the generally positive outlook for commercial real estate, but the strengthening economy has also supported momentum. Gross domestic product has risen steadily over the last several years — aside from temporary setbacks such as the polar vortex of the first quarter — and the outlook remains positive through the end of 2014.
In addition, steady hiring has finally surpassed the 8.7 million jobs lost during the recession, and by year-end, the U.S. economy should employ 1.7 million more people than the pre-recession peak. Though many remain underemployed or have left the labor force, the hiring trends continue to point in the right direction. This combination of steady growth has allowed the economy to spur demand for commercial real estate while minimizing risks of inflationary pressure.
Job gains have supported limited income growth, but the surging stock market has helped household wealth significantly. As of the end of first quarter 2014, U.S. household wealth was up 19 percent from its 2007 peak and more than 47 percent from the trough in 2009. That has supported rising consumer confidence and substantive gains in retail sales. These steady positive factors will support a growing demand for commercial real estate space on a broad basis.

Interest Rates

Several years of low interest rates have helped the real estate market recover from its downturn with a lot less pain than would have been imagined in the wake of the 2008 credit crisis. The rapid recovery in asset values and rebound in lending have reduced the severity of what many thought would be a second thrift liquidation-style event. Increasing economic strength in recent months has lifted the prospects that the Federal Reserve will begin raising its short-term rates early next year, posing limited risk to the real estate momentum.
However, interest rates are unlikely to rise quickly enough to slow the economic momentum because demand for U.S. Treasurys remains robust. International investors in particular have sought out the security of U.S. Treasurys as a range of uncertainties plague parts of the world. While China has cut back its purchases, investors from Japan, Europe, and the Middle East have picked up the slack. Risks of escalating aggression in Ukraine and the Middle East cement the perception of the U.S. as a beacon of stability.
What’s more, the Fed is under little pressure to increase rates. The U.S. economy is improving, but inflation has remained in check and the Fed remains focused on the large number of workers that have dropped out of the workforce or are underemployed. The November elections are another wildcard that could re-ignite gridlock in Washington, D.C., and stall the nascent growth cycle.
Consequently, the Fed is unlikely to raise the federal funds rate until the signs that the economy is heating up really accelerate. Presently, most anticipate that this will not happen before the middle of next year, but there is a chance that the Fed will surprise and begin tightening liquidity sooner.
Once rates do begin to rise, the impact on commercial real estate may be nominal. Historically, capitalization rates have not moved in lockstep with interest rates, with tightening spreads being the norm during most growth cycles. As a result, should rates begin to rise later this year or early in 2015, it remains unlikely that cap rates will escalate in pace.
Although cap rates are near historical lows today, the risk premium — the spread between 10-year Treasury yields and cap rates — persists near historical highs. If Treasury yields rise because of positive factors — such as strong economic growth — investors will have a more optimistic outlook about property performance and be willing to absorb some of the rate increase in the form of lower risk premiums. The bottom line is that, aside from a major exogenous shock, interest rates and monetary policy are not likely to have a watershed impact on the economy or commercial real estate in the near term.

Commercial Real Estate Performance

In a real sense, the moderate pace of the economic recovery has been good for commercial real estate performance. Usually new construction comes roaring back after recessions, but incremental growth and the fresh memory of the severe recession has kept development largely in check. Construction is creeping back, particularly for apartments, but it is predominantly centered in core areas of the strongest metros. Supply factors will be slower to emerge and less problematic this cycle than in past recoveries.
Apartments. Apartments have been a favorite asset class for investors since the downturn. Not only did fundamentals remain more stable during the recession, but debt was available from government-sponsored agencies when other lenders tightened their lending criteria. Earlier this year, Fannie Mae and Freddie Mac reined in their lending, and their share of multifamily loans fell to 47 percent in 2014, down from 87 percent in 2009, but it appears they are increasing their allocations through the second half of the year. In addition, banks, insurance companies, institutions, and CMBS programs have stepped up their pace of lending, producing a highly competitive lending environment. Loan rates are mostly in the 4 percent range but can go as low as the mid-3 percent range depending on the term, leverage, and borrower credentials.
With pricing of premium assets in core markets selling with cap rates in the 3 percent to 4 percent range, investors are increasingly moving to secondary and tertiary markets in search of yield. But even those markets are becoming more expensive, as average cap rates for high-quality apartment properties reach below 7 percent.
Office. Investor demand in core markets remains intense. In the first half of 2014, 40 percent of the $50 billion of office sales came from six core markets where class A properties trade at cap rates in the 4 percent range. However, investors pursuing stronger yields and a less-competitive bidding process are increasingly branching into secondary and tertiary markets, where sales increased by 30 percent during the first half of the year. With suburban offices in many metros offering investors a 150-basis point yield premium relative to CBD office assets, investors have begun to search beyond core locations.
Readily accessible debt capital has also fueled activity this year as loan spreads have tightened by 25 bps from last year. Rates range between 4.4 percent and 5.25 percent for 10-year loans with moderate leverage, and leverage up to 70 percent is common. All lender types have become increasingly active, but national banks have increased their share of lending activity to 26 percent. CMBS will also be a positive factor, and it has already increased lending to this sector by $6.1 billion from last year.
Retail. Nationally, vacancy rates of retail properties have been tightening, as modest absorption has topped the limited construction pipeline. In the year ending in the 2Q14, only 37.4 million square feet of space, or 0.5 percent of total space, came on line. This gradual tightening of vacancies has recently sparked rising asking rents, but rents still remain about 11 percent below their pre-recession peak.
Despite the still-soft performance climate for many retail assets, investor demand is strong, particularly for single-tenant properties that are leased to national tenants. The volume and number of transactions between $1 million and $10 million reached a record $10 billion in the 1H14, while price per square foot and cap rates also hit new heights. Multi-tenant sales are also strong, although shy of peak prices. The availability of debt continues to improve, though lenders remain focused on stabilized properties. Local and regional banks are increasing market share, while CMBS is dominant in secondary and tertiary markets.
Industrial. Investors seeking relative stability and diversity to augment existing portfolios have increased demand for industrial assets. In addition, institutional investors have targeted portfolio assets to build a critical mass of assets in a given locality. Cap rates are tightening for all industrial segments, with warehouses making the biggest gains. Warehouse cap rates averaged 7.2 percent nationally in 1H14, and top properties in major markets traded at yields under 6 percent. Flex properties averaged 7.8 percent cap rates nationally in the first half.
Lenders are actively lending on industrial properties, although underwriting remains relatively conservative. National, international, and regional banks increased their share of industrial loans to 62 percent in 2013, up from 48 percent the prior year. Lenders have largely targeted debt yields of 8.5 percent to 9 percent, producing leverage of 70 percent, while offering longer term rates of 4.6 percent to 5.5 percent.

William E. Hughes is senior vice president and managing director of Marcus & Millichap Capital Corp., based in Irvine, Calif.

Thursday, November 10, 2011

RALEIGH – Gov. Bev Perdue today announced that Smithfield Packing Company, a subsidiary of Smithfield Foods, Inc. (NYSE: SFD), a $12 billion global food company and the world’s largest pork processor, will expand its facility in Lenoir County. The company plans to create 330 new jobs and invest $85.5 million during the next three years in Kinston. The project was made possible in part by a $700,000 grant from the One North Carolina Fund. As part of the expansion in Kinston, the company will add a new product line of packaged meats. Smithfield Foods currently has more than 12,400 employees across North Carolina.

“Creating jobs is my top priority,” Gov. Perdue said. “North Carolina is an ideal location for global manufacturers to expand. Our skilled workforce, job training programs, commitment to success of agribusinesses and our excellent business climate are drawing more and more companies here.”

Smithfield Packing Company, which operates the existing Kinston facility, was founded in 1936. Primary lines of business include fresh pork, smoked meats, bacon, cooked hams, and hot dogs for retail, foodservice, and deli channels. The company exports products to approximately 30 countries. In addition to the Smithfield brand, its Gwaltney, Esskay, and Cumberland Gap products are among the leaders in their respective markets.

"The expansion of the Kinston plant will allow us to increase our packaged meats production to keep up with growing customer demand for our products," said C. Larry Pope, president and chief executive officer of Smithfield Foods.

"From a local economic development standpoint, we are pleased that this project will bring additional jobs to North Carolina and add revenue to the local economy," said Tim Schellpeper, president of Smithfield Packing. "North Carolina is a great place to live and work, and we are delighted to contribute to the growth of this region,” he continued.

Salaries will vary by job function, but the average annual wage for the new jobs will be $27,644, plus benefits. The Lenoir County average annual wage is $29,276.

The One NC Fund provides financial assistance, through local governments, to attract business projects that will stimulate economic activity and create new jobs in the state. Companies receive no money up front and must meet job creation and investment performance standards to qualify for grant funds. These grants also require and are contingent upon local matches.

“Smithfield needed what most companies seek: a skilled workforce and a business climate that will help them thrive,” said Rep. William Wainwright, of Havelock. “They found all of that in North Carolina because we worked for so long to invest in education and infrastructure, and we continue to fight for those investments.”

North Carolina continues to have a top-ranked business climate. Through Gov. Perdue’s JobsNOW initiative, the state works aggressively to create jobs, train and retrain its workforce, and lay the foundation for a strong and sustainable economic future.

Through use of the One NC Fund, more than 55,000 jobs and $11 billion in investment have been created since 2001. Other partners that helped with this project include: the N.C. Department of Commerce, N.C. Community Colleges, Lenoir County, City of Kinston, and N.C.’s Eastern Region.

Wednesday, July 20, 2011

RALEIGH—Governor Bev Perdue announced today that a new aviation work package is coming to the state.Spirit AeroSystems Inc., one of the world’s largest independent suppliers of commercial airplane assemblies, will add a new program to its manufacturing operations at the N.C. Global TransPark in Kinston. Spirit will establish production for the Gulfstream G250 wing at the North Carolina facility. The company anticipates that 150-200 jobs will be created over the next 5 years as part of this work package.

“North Carolina continues to be a leader in the aerospace industry more than 100 years after the Wright Brothers made their historic first flight at Kitty Hawk,” said Gov. Bev Perdue. “Our community college customized training programs and skilled workforce are critical tools for globally competitive companies like Spirit. This new work package continues Spirit’s significant commitment to bring jobs and investment to North Carolina.”

Today’s announcement is part of Spirit’s overall expansion and existing commitment to create jobs in North Carolina. Spirit already produces a major composite fuselage and leading edge wing spars for the Airbus A350commercial aircraft at the Global TransPark. The new work package announced today will add metallic structures, as well as a general aviation component to Spirit AeroSystems’ operation at the Global TransPark.

“This is the next step in our evolution in North Carolina and further diversifies the work being done at the Kinston site,” said Dan Wheeler, VP/GM of the North Carolina site. “We’ve enjoyed tremendous support from our North Carolina partners and look forward to executing on our two aircraft programs.”

Based in Wichita, Kan., Spirit AeroSystems also has facilities in Tulsa and McAlester, Okla.; Prestwick, Scotland; Preston, England; Kuala Lumpur, Malaysia; and Saint-Nazaire, France, in addition to its Kinston plant. In the U.S., Spirit's core products include fuselages, pylons, nacelles and wing components. Additionally, Spirit provides aftermarket customer support services, including spare parts, maintenance/repair/overhaul, and fleet support services in North America, Europe and Asia. Spirit Europe produces wing components for a host of customers, including Airbus.

Other partners who assisted with this announcement include: the N.C. Department of Commerce, N.C. Community Colleges, Global TransPark which is an agency of the N.C. Department of Transportation, and Lenoir County.

Thursday, March 10, 2011

The medical products maker plans to invest $29 million and will add jobs.

By John Murawski STAFF WRITER

A medical-products manufacturer plans a second major expansion of a Kinston factory that was destroyed in a 2003 explosion and then rebuilt.

State and local officials will give the company, West Pharmaceutical Services, up to $3.5 million in tax credits and other financial incentives for its promise to invest $29 million at the Kinston plant over five years. The facility in Kinston, about 90 miles southeast of Raleigh, makes components for syringes and injection devices.

The Pennsylvania-based company plans to fill positions in microbiology and engineering, even though the state and local incentives are not contingent on job creation.

West is scheduled to announce plans in Kinston at an event this evening with CEO Donald Morel, state and local public officials, and the Kinston High School Choir.

West said told public officials it selected Kinston for upgrades over other plants in North Carolina, Florida and Nebraska. The $29 million will pay for new technologies in washing, inspection and clean manufacturing processesto be used in the production of pharmaceutical packaging products.

In its home state, meanwhile, West is shutting down a manufacturing facility and laying off 170 employees this year. That facility’s production will be transferred to other sites.

West employs 325 people in Kinston after having added more than 100 jobs in the past four years.

West spokeswoman Genevieve Gadenne said the companyhas not determined how many more jobs it will add in Kinston. She noted West did not cut jobs locally during the recession.

The local and state incentives are not contingent on job creation, said N.C. Department of Commerce spokeswoman Kimberly McCarl.

For the Kinston expansion, West stands to receive just over $1million in local incen- tives from Lenoir County, up to $500,000 from the state utility fund for infrastructure improvements, and up to $2 million in tax credits from the N.C. Department of Revenue.

Officials at the Lenoir County Economic Development Department could not be reached for comment.

West has had a presence in Kinston since 1975, but the original plant was destroyed in the explosion that killed six people and injured several dozen. The facility was rebuilt in 2004.

West announced a $20 million upgrade in Kinston in 2007. At that time, the company employed 211 at the site.

West committed to create 154 jobs, qualifying for a One N.C. incentive grant worth up to $300,000. To date, West has received $225,000 of that job-creation grant, McCarl said.